How many cities? Return to Ports... Output mkt MPort, P Input source A Input source B Weight from A = $15/mile Weight from B = $15/mile Weight to M =

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Presentation transcript:

How many cities?

Return to Ports... Output mkt MPort, P Input source A Input source B Weight from A = $15/mile Weight from B = $15/mile Weight to M = $10/mile

Return to Ports... Output mkt MPort, P Input source A Input source B Weight from A = $15/mile Weight from B = $15/mile Weight to M = $10/mile Start at P. A move toward A or B will cause offsetting changes in input transport costs, but will increase output transport costs by $10/mile  loss of $10/mile.

Return to Ports... Output mkt MPort, P Input source A Input source B Weight from A = $15/mile Weight from B = $15/mile Weight to M = $10/mile Start at P. A move toward A or B will cause offsetting changes in input transport costs, but will increase output transport costs by $10/mile  loss of $10/mile. A move toward M will decrease transport costs of final good by $10 but will increase procurement costs by $30  loss of $20/mile.

Profit Mkt. Structure and Mkt. Area CDs per store $ D MR MC AC qmqm pmpm

If other firms enter,... CDs per store $ D1, why? MR, why MC AC qmqm pmpm qeqe pepe D

Production v. Travel Cost CDs per store $ Ave. Travel Costs Ave. Prod. Costs Ave. Total Costs Lowest production cost qcqc qmqm qtqt ctct Monopoly output Lowest total cost

Market areas Algebraic model d = Monthly per capita demand (CD/person) e = Population density (Persons/sq.mile) A = Land area of region (Sq. miles) q = Output/store. Total demand = Q = d e A = (CD/person)* (Persons/sq.mile)*(Sq. miles) = (CD/1)* (1 /1)*(1) = CD

How many stores, mkt. Area? Total demand = Q = d e A q = CD/store, so: divide Q by q or: N = Q/q = CD/(CD/store) = 1/(1 /store) = # stores Market area per firm: M = Land Area/(# of firms). M = A/N=A/(Q/q) = A (q/Q) = Aq / Ade = q / de = (CD/store)/[(CD/person)*(persons/sq.mile) = q / de = stores/sq.mile

Spreadsheet for Table 5.2 Var.SymbolValue Per cap. demandd4 Pop. Densitye50 Demand densityd*e200 Land AreaA300 Output/storeq1000 Total demandQ=d e A60000 Number of storesN=Q/q60 Market areaM=q/(de)5

Market Areas Scale economies -- Increase market areas. Travel costs -- Increase market areas Per capita demand -- Decreases market area Population density -- Decreases market area Income? -- Let’s see. –Assume that income elasticity of demand for CDs = 0.5.

Spreadsheet for Table 5.3

Next Time More on Chapter 5, and … ShrinkingShrinking CitiesCities